How could a bank's hedging activities with futures contracts expose it to liquidity risk?

When a bank hedges with futures contracts, it needs to maintain margin accounts which are settled daily to reflect market changes:

Margin Calls: If the market moves against the position of the futures, the bank must add funds to the margin account to cover potential losses. This can create significant liquidity risk if large sums are needed quickly.

Daily Settlements: Futures markets require daily mark-to-market settlements which means that any adverse movement in prices necessitates immediate liquidity to meet the margin requirements.

Market Volatility: In times of high volatility, the daily margin requirements can be substantial, potentially causing a scramble for liquidity if the bank has not pre-arranged sufficient liquidity buffers.

Thus, the need for daily margin settlements exposes the bank to liquidity risk as it must be able to provide cash on short notice.